UK Energy Supply: Security Or Independence?

House of Commons Energy and Climate Change Committee UK Energy Supply: Security or Independence? Eighth Report of Session 2010–12 Volume I Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/ecc Ordered by the House of Commons to be printed 10 October 2011 HC 1065 Published on 25 October 2011 by authority of the House of Commons London: The Stationery Office Limited £24.50 The Energy and Climate Change Committee The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies. Current membership Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, Glasgow North West) Laura Sandys MP (Conservative, South Thanet) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test) The following members were also members of the committee during the parliament: Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West) Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/ecc. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Report of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Sarah Hartwell-Naguib (Clerk), Richard Benwell (Second Clerk), Dr Michael H. O’Brien (Committee Specialist), Jenny Bird (Committee Specialist), Francene Graham (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant) and Nick Davies (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected] The UK’s Energy Supply: Security or Independence? 1 Contents Report Page Summary 3 Primary Energy Supply 3 Infrastructure 3 Energy Users 4 1 Introduction 5 2 Context 6 Security versus independence 6 3 DECC’s approach to energy security 8 Definition of energy security 8 Threats to energy security 8 Development of an energy security strategy 9 Assessing progress 10 4 Primary energy supply resilience 13 UK Continental Shelf 13 Internal threats to supply 14 Budget 2011 15 Refined Products 16 Russian gas supplies 17 International gas pipelines 18 Nord Stream 18 Southern gas corridor 19 Nabucco 19 South Stream 20 ITGI and TAP 21 5 Infrastructure resilience 22 Gas storage 22 Strategic gas storage 22 Different types of gas storage 22 Need for increased storage 23 Impact of intermittent renewables on gas storage 23 Gas imports 24 Incentivisation and economics of gas storage 24 Sharpening price signals 25 Public Service Obligation 25 Government intervention 26 Oil stocks 26 An independent strategic oil stock holding agency 27 Electricity Infrastructure 28 Generation infrastructure 28 2 The UK’s Energy Supply: Security or Independence? Intermittency and system flexibility 31 Carbon Capture and Storage (CCS) 32 Electricity Distribution Networks 33 Operational changes to networks 34 Securing investment in infrastructure 35 6 Energy users 38 Demand reduction 38 Demand side response 40 Public awareness and understanding 41 Adopting new technologies 41 Communication 42 7 Conclusion 43 Conclusions and recommendations 44 8 Annex 1: Summary of potential threats to UK energy security identified by witnesses to this inquiry 54 9 Annex 2: A set of candidate energy resilience indicators proposed by the UK Energy Research Centre 56 Possible resilience indicators for primary energy supply 56 Possible resilience indicators for energy infrastructure 56 Possible resilience indicators for energy users 56 Formal Minutes 49 Witnesses 50 List of printed written evidence 51 List of additional written evidence 52 List of Reports from the Committee during the current Parliament 53 The UK’s Energy Supply: Security or Independence? 3 Summary Energy security has always been high on the political agenda, but its importance has risen as the UK has become increasingly dependent on imported energy, experienced high and volatile oil and gas prices, and addressed the challenge of reducing our carbon dioxide emissions. DECC needs to define “energy security” and adopt a more strategic and systematic approach to provide a clear goal for policy interventions, taking a more holistic view in order to ensure that the energy system is resilient to both short-term shocks and longer- term stresses. Primary Energy Supply It is inevitable that the UK will become increasingly reliant on energy imports. This is not necessarily incompatible with increasing energy security; it can be maintained by a diverse energy portfolio that does not rely too much on either a single supplier or a single fuel. The decline of the UK Continental Shelf is not a major concern in terms of energy security, but the way in which the £2 billion levy on North Sea producers was announced in Budget 2011 may have undermined investor confidence. The Government needs to work closely with the industry to restore that confidence. Infrastructure The Government needs to communicate a clear strategy to incentivise more gas storage if it is to ensure timely investment. It is only by having sufficient gas storage that we can build up broader system resilience. We also recommend that the Government set up an independent stock-holding agency—funded by industry—to manage privately held strategic oil stocks. We are not convinced that the proposals set out in the White Paper on reforms to the electricity market strike the right balance between encouraging investment in new gas-fired plant in the short-term (to fill the gap that will be created by the closure of around 19GW of nuclear, oil-fired and coal-fired plant by 2020) and the need to decarbonise the power sector over the course of the 2020s, which will ultimately entail only a very limited role for unabated gas-fired capacity. In particular, the proposed form of the Emissions Performance Standard could risk locking the UK into a high-carbon electricity system in the future. Electrification of heat and transport will result in significantly increased loads on the local distribution network. An increase in distributed energy generation combined with greater use of demand side measures could mean that Distribution Network Operators will need to move away from the currently relatively passive operation model towards becoming Distribution System Operators with responsibility for balancing supply and demand on their network. The Government needs to do more work to ensure that Distribution Network Operators are sufficiently prepared for the changes ahead. 4 The UK’s Energy Supply: Security or Independence? Energy Users Even though improving energy efficiency will bring benefits for energy security, it is often difficult to deliver in practice. Failure to deliver could have serious consequences for energy security. New “smart” technology will provide opportunities for energy users to engage in demand side response measures, which could play a vital role in ensuring the security of the electricity system. The full potential of such measures to contribute to energy security is not yet known and we urge the Government to investigate this further. Although energy users are a key component of the energy system, they are perhaps not as well understood as the technologies that make up the supply side of the system. If we are to make a successful transition to a low carbon economy, it is essential that the Government understands both the social as well as the technical feasibility of new technologies in the energy system. The UK’s Energy Supply: Security or Independence? 5 1 Introduction 1. Whilst energy security has always been high on the political agenda, attention to it has increased as the UK has become increasingly dependent on imported energy. This was highlighted in 2011 by the disruption to oil supplies caused by the Arab Spring, as well as the rethink on nuclear power triggered by damage inflicted upon Japanese nuclear reactors by the tsunami of March 2011. We decided to look at this essential aspect of energy policy both to assess the Government’s performance in broad terms and to highlight specific areas of concern in the security of the UK’s energy supply. 2. We announced our inquiry on 11 February and sought evidence on: the resilience of the UK energy system to future changes in fossil fuel and uranium prices; the sensitivity of the UK’s energy security to investment

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